Musings on World events from the perspective of a Social and an Economic Liberal.

Tuesday, March 17, 2009

The urgent need to simplify tax or why off-shore havens still exist

Britain has one of the most complicated tax codes in the world. Though not as truly terrifying as the Mobius curve of the American regulations, the complicated exemptions and overlapping liabilities make even filling out a personal tax return a daunting process. For corporate tax liabilities, it usually requires a PLC an entire department to establish what liabilities might be.

It is not just the complication of the system, it is also the high price.

According to the OECD in 2006 Britain ranked ninth in the industrial world in terms of the size of overall tax burden, taking 37.4% of GDP in tax. Germany, Canada, Switzerland and the USA all take substantially less. Only the very high tax economies mainly of Scandinavia together with France and Italy take more. As Colbert once wrote, "the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing".

Yet one reason why there is not so much "hissing" is that, for the corporate sector and for very rich individuals, there are many ways to use the complicated regulations to evade tax and reduce the overall tax burden. There are many jurisdictions that have dramatically lower tax levels than the UK, and by placing corporate entities in these places, substantial British tax liabilities have long been successfully mitigated or even eliminated.

Morally tax evasion could be seen as quite questionable- after all these individuals and institutions still receive the benefits from functioning in a society that is funded by other peoples money. Yet for me it is a quite clear example of the invisible hand in action- and often with the clear assent of the tax authorities themselves. Indeed the very buildings that the British HM Revenue & Customs- formerly the Inland Revenue- work from are owned though a PFI deal by an entity registered in Bermuda.

The fact is that the government itself recognises that the official tax burden in the UK is so extreme that it shows an imperial hypocrisy about the whole issue of tax avoidance. Officially HMRC condemns tax avoidance, but in practice it winks at many schemes. As a result there is hardly a single corporation of any size, including state corporations, which do not employ tax avoidance methods somewhere in their structures.

Simply to administer the incredibly complicated system of personal tax credits probably costs at least 20% of the funds involved- the exact number has not been permitted for release under the so-called "Freedom of Information act". The overall fiscal drag- the clearly very substantial costs of collection to the state, together with the indirect burden, including the employment of accountants and tax advisers not to mention entire company departments solely to deal with tax indicates that the total direct and indirect costs of tax collection and regulation in the UK could be as much as 30% of the tax take - a truly staggering £100 billion, or 10% of the UK GDP.

This is simply not sustainable.

By contrast, in Estonia the fiscal drag is negligible- the taxes are flat and very simple- so no need for accountants. The total cost of collection is continually reducing as declaration via the Internet becomes universal. It is quite clear that there is a model for Britain here.

Yet many oppose a flat tax rate because they believe that it is unfair that the rich should pay the same as the poor. Of course, ironically, our so called progressive taxation system has so many loopholes that the rich in Britain actually pay much less than the poor, so paying the same would be an improvement on the current position anyway. However there is a way to make a flat tax system progressive: set the tax threshold at quite a high level, so that the bottom 20% of earners don't pay tax at all. This would also eliminate the need for the ruinously expensive and unworkable system of tax credits that Gordon Brown's tinkering has created.

Tax havens have come into being to fulfil a clear need: the market has provided an answer to the absurdities of the UK tax code. Instead of struggling to put its fingers and toes into an increasingly leaky dam, the best solution is simply to create a bonfire of much of the current tax code. Simplification and clarity (and low cost of collection and administration) must be the watchwords.

Labour has failed- in the face of the greatest recession most of us have ever seen, there is no room for the scale of waste that the current fiscal drag imposes upon the British economy. Reform is long overdue.

9 comments:

Great post ,wrong Party , I sometimes wonder how on earth you put up with them CS

The taxation sysyem is in fact as redistributive as it can get according to the IFS and your Party has usually wanted it to be more re-distributive not less.You bewilder me.A mixture of good sense , absolute lunacy and a peculiar aversion to the Party that has espoused the sort of values you claim to hold .There is something behind this , something persol I `d guess some sense of exclusion ,otherwiseyou would be a member of the Conservative Party. Its not as if there are no fans of the EU in it and it is the place to be for deciding our European future (or not I hope )

Newmania, glad you like the post, but you really should understand that i am not a particular maverick within my party- I am fully approved as a Parliamentary candidate andbecause of family connections I do know personally most of the leadership. It is not that I am in the wrong party, but your perception of what my party is is just mistaken.We truly do put individual freedom and sound economics first: to the point that we will take on sectional interest wherever it is found: whether in overweening government, overweening civil servants or indeed in overweening private sector companies.

As for a flat tax, well no party has adopted it, and it is still pretty controversial in any party. What is not controversial is the need for a major simplification of tax, and since the Lib Dems are the only party advocating a fall in tax, it is pretty clear that we also want much simpler taxes too.

Great post for the most part. The only thing I would take slight issue with is over tax credits. I would completely agree with taking the poorest 20 or even 40% of people out of income tax altogether (it wasn't paid by more than 5% of people until the First World War). However, the current system of tax credits more than make up for the tax paid - in some cases, more than 40% more back in TC than was paid in the first place. They have become a form of benefit, however expensive, cumbersome and stupid they may be.

The only way therefore that tax credits could be replaced without a serious financial impact on some of the poorer members of society, especially for struggling families with young children who need it most, is by simultaneously massively beefing up whatever the Family Allowance is called this week. And that certainly wouldn't be popular with some of the more Malthusian elements in our political class.

Hi Half Blood, I agree that for the low paid, there would probably need to be at least transitional arrangements, at least as far as family tax credit is concerned, but the aim ultimately would be to allow the low paid to excape the poverty trap by taking them out of tax altogether.